May 25, 2021

Fedspeak crushes inflation fears

US 10-year Treasury yields near bottom of last weeks range

US dollar opens lower compared to Friday close

USDCAD open 1.2037-41, Overnight range 1.2032-54, Friday close 1.2066

FX at a Glance

FX Recap and Outlook

The investing world outlook is rosy as Canada returns from a long weekend.  A not-so-holy trinity of Fed officials hammered home the message that rising inflation is transitory and that the US economy requires significant monetary accommodation for an extended period before the Fed will need to raise interest rates. Fed Governor Lael Brainard said “”Have been expecting some higher inflation readings in the near term because of base effects.” St Louis Fed President James Bullard echoed  those remarks saying we “Have been expecting some higher inflation readings in the near term because of base effects.” Traders liked the message.  Global equity markets rallied, 10-year Treasury yields drifted around 1.60%, commodity prices recouped some losses, and the US dollar sank.

Back in the day, risk aversion sentiment would have rippled throughout markets on the news a Belarus fighter jet intercepted a Ryanair passenger plane and forced it to land or be shot out of the sky.   In 2021, the sentiment is “not my flight, not my problem.”  EU and US officials are readying sanctions against Belarusian officials. 

EURUSD bottomed out at 1.2150 in Asia Monday and climbed steadily, rising to 1.2261 in Europe today, after better than expected German IFO survey results.  The Expectations indicator at 102.9 is the highest reading since 2011.   Also, EURUSD is benefitting from hopes for a robust EU economic recovery as the pace of vaccines increase. The move above 1.2250 opens the door to further gains to 1.2350.  However, there are concerns the ECB will push back against a higher currency.

GBPUSD rallied from 1.4115 Monday to 1.4210 today before retreating to 1.4165 in NY., undermined in part by EURGBP demand. The GBPUSD outlook is bullish above 1.4130.

USDJPY continues to retreat after peaking at 109.75 May 13, with prices weighed down by soft US Treasury yields.  Traders ignored news that the US issued a “do not travel” advisory for Japan.

NZDUSD is the best performing major G-10 currency, rising 0.88% since Friday’s close.  The RBNZ monetary policy meeting is Wednesday and reported, Westpac Bank suggests there is a risk of a hawkish surprise in the statement.  Firmer commodity prices underpinned both AUDUSD and NZDUSD.

USDCAD remains under pressure.  Prices slid 1.2350 at the beginning of the month to 1.2032 overnight, driven by steady to firm oil prices, and other commodity prices near record-high levels.  Expectations for a robust post-pandemic recovery are also weighing on prices.  More importantly, investors expect the Bank of Canada to lead off the G-10 central bank rate hike cycle. That sentiment was underscored by comments from BOC Governor Tiff Macklem last week.    He expressed concern about rising house prices, which analysts conclude meant he would be forced to raise interest rates.  

USDCAD Technical Outlook

US Consumer Confidence, and New Home Sales reports are on tap.  The Canadian calendar is empty The intraday USDCAD technicals are bearish below 1.2080, with the move below 1.2050 hanging a target on the 1.1935-50 area.  For today, USDCAD support is at 1.2030 and 1.1980.   Resistance is at 1.2060  and 1.2090.  Today’s Range 1.2010-1.2070

Chart: USDCAD 4 hour

Source: Saxo Bank

FX open, high, low, previous close

Source: Saxo Bank